GKN's (GKNCF) CEO Nigel Stein on Q4 2015 Results - Earnings Call Transcript

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GKN Plc (OTC:GKNCF) Q4 2015 Earnings Conference Call February 23, 2016 3:30 AM ET

Executives

Nigel Stein - Chief Executive

Adam Walker - Group Finance Director

Kevin Cummings - Chief Executive Aerospace

Phil Swash - Chief Executive Driveline

Peter - Chief Executive Powder Metallurgy

Analysts

Andy Simms - Citigroup

Jonathan Hurn - Credit Suisse

Stephen Swanton - Redburn Partners

Andrew Carter - RBC Capital Markets

Andrew Gollan - Berenberg

Nigel Stein

And, good morning everyone. Welcome to GKN 2015 Results Presentation. We'll follow the usual format and introduction from me. Adam will take you through the financials, and I will then look to the future and cover the outlook statements, and we'll then take questions.

I'm joined on the stage by the divisional chief executives, Adam, Kevin, Phil and Peter, part of the great international team who run GKN. Adam, of course, has two hats on today; Group CFO as well as running Land Systems. And in the audience, we have our Chairman, Mike Turner; and Shonaid Jemmett-Page, one of our non-executive directors. Thank you, both, for coming.

I was pleased with our performance in 2015. We delivered on expectations, successfully completed the Fokker acquisition, managed costs, and took the necessary steps to make it another year of growth. We knew going into the 2015 wouldn't be easy, and the midyear slowdown in China and market pressures elsewhere certainly didn't help. But we overcame all that, and as well as delivering on 2015 set ourselves up nicely for good growth in 2016.

The slide shows the headlines. Sales up 3%, PBT slightly ahead -- there's some ups and downs in that which Adam will cover, earnings down slightly due to higher tax and the dividend increasing. The highlights, Aerospace completing the acquisition of Fokker, Driveline growing sales above market, Powder Met further strengthening its margin, Land Systems downsizing in the face of tough market conditions; and importantly, across the group, moving forward with our strategy.

Let me briefly cover each division before handing over to Adam. Aerospace is in a period of transition. You've heard me say before that whilst some of our newer commercial programs would ramp up, other mature military programs would wind down. And that's exactly what happened. Commercial sales increased by 6% whilst military declined by 9%. With commercial now making up 75% of our Aerospace sales, that generated 2% overall organic top line growth. As expected, the switch between mature and new programs put margins under pressure, not helped by the rate reduction in the A330 which took effect in quarter two. It took concerted management efforts, plus some help from one-off items to hold profits broadly level with last year.

Going forward, in the short term, this underlying margin pressure will continue, but we will also see further benefit from the commercial ramp up with the A350 leading the way. We moved into profit on A350 units delivered in quarter four, which will be a help to 2016's underlying performance. Order intake was good with $3.5 billion of new work being secured in the year. In June, along with the Sheets acquisition, we agreed a contract with Boeing which awarded us both the engine lip skins on the Boeing 737 MAX and the 777X as well as additional structures work on the 787. It has long been a goal to increase our content on Boeing commercial aircraft, and our sales now are fairly evenly weighted between Boeing and Airbus aircraft.

We've also been working hard with Airbus and were pleased to strengthen our overall supplier partnership status with them. Amongst other things, that confirmed us as a strategic partner on future additive manufacture, or 3D printed structural components. On the engine side of the business, we signed a risk and revenue-sharing partnership with Pratt & Whitney on the Irkut Geared Turbofan engine. That now makes us a partner on all variants of the GTF family.

Turning to Fokker, the acquisition closed at the end of October after the necessary approvals came through. We've been hard at work since and the integration process is going very well. Fokker is a sizeable acquisition adding nearly 20% to our Aerospace sales. It's a good strategic fit with GKN and brings us excellent technology and very capable people. Its structures business strongly complements ours and its expertise in lightweight materials adds to our capability. The Fokker Elmo electrical business and the landing gear business take us into interesting new areas of the aircraft. Services is new to us, so we're still in learning mode as to its potential. Fokker adds to GKN Aerospace's footprint in nine different countries including bringing plants in China, Turkey and Mexico, as well as the Netherlands, of course. And it brings good program positions in commercial, Airbus A350; in military, the F35; and in business jets, the Gulfstream G650; all very successful aircraft in their markets.

GKN has a strong process for integrating acquisitions, and we are well down the road of bringing Fokker into the GKN family. We have validated the expected synergies and are on track to realize them. Importantly for the future, the combination of Fokker and GKN has been very well received by customers, who see the advantages of the unified business.

To finish in Aerospace, I referred earlier to this being a period of transition for the industry as some programs ramp up and others wind down. This slide, which categorizes our major programs by expected growth rate and our work content, shows a strong bias to the right-hand, a growth column, underpinning our expectations of growth in 2017 and beyond.

Moving now to automotive and looking at the charts of production by market, which are the blue bars, you can see it was a different picture from the past. It was Europe that took the market higher. China, the growth engine of previous years, was still up, but its growth wasn't linear, with a sharp slowdown in quarter two, three and a recovery in quarter four as vehicle taxes were eased. Happily, that recovery has also sustained into 2016.

The benefit of GKN Driveline's broad global reach is absolutely clear. As you can see from the yellow bars, in spite of those shifts, we again beat the market, with organic sales growth of 5% against a global production increase of 1.4% due to our strong performance in Europe. In China, we didn't make up the first-half shortfall to market. Quarter three was more difficult than we thought, but we recorded in quarter four, as we had expected. Brazil is a relatively small market, only 2 million units, but the sharp market decline made it a painful one. Driveline's strong top-line growth helped take profits forward and raised the trading margin to 8.2%. Our success with CVJ drive shafts keeps coming, and it remains 60% of the overall Driveline business. We were delighted to win our first significant business from Daimler who are traditionally an in-house manufacturer, but have recognized the benefits of GKN's superior technology and cost efficiency. When launched in two years' time, this program will double our business with Daimler.

On all-wheel drive, we continue to be successful, with good growth on the BMW X Series vehicles, amongst others. GKN's outstanding all-wheel drive technology is being vividly demonstrated on the Ford Focus RS, which is getting rave reviews from the motoring press for its handling and the GKN Driveline system.

Our eDrive business, which is small today, but growing as we move further into the electric drive train, is having great success with eAll-wheel drive axels, such as the one from the Volvo XC90 pictured here. A recent award for a new PSA plug-in hybrid model will help keep us market leader in this product segment, so great progress in Driveline who won 0.9 billion of annualized new and replacement business on a broad range of programs.

Powder Metallurgy had a good year and delivered strong margin progression. Like-for-like sales were up around 3%, which is obscured in the reported numbers by the pass-through of lower scrap steel surcharges and the sale of our business in Argentina. 2015 saw a record level of powder production and we should do even better in 2016, when for the first time, we add powder capacity in Asia through a joint venture in China. Once approved by the government, this will make us the market leaders of quality grade powder in the country.

The Powder Met team also upgraded our process equipment in North America bringing it to the level of Europe and Asia. The project included digitizing quality and control systems with nearly 300 items of plant and equipment now connected to the web giving improved operating efficiency. This enhances our ability to manufacture sophisticated products such as the differential gears we make for the Ford F-150 shown here. And we're pushing ahead fast with new technologies such as additive manufacturing and advanced powders, including in 2015 successfully qualifying GKN's titanium powder for aerospace use. All these advances provide good opportunities for the future, underpinned by the excellent order win rate of 185 million in the year.

As expected, Land Systems had a tough time with no help from their markets. Organic sales were down 6%. Agricultural equipment markets, which account for 45% of sales, fell sharply, mainly in North America. Construction and mining were also softer. We implemented the restructuring we outlined a year ago at a cost of 11 million. Without that hit, the business would have come in with a margin around 5%, pretty good compared to its competitors.

We also worked hard to enhance our capabilities ready to reap the benefits from the cycle turns. New services such as the powertrain support highlighted in the picture focus on niche low-capital opportunities with specific customers. We've planned for another tough year and are continuing with self-help measures to drive productivity whilst going after selective new business.

So 2015 was a pretty good year, another year of progress for GKN. We outgrew our markets in automotive. We made important acquisitions in aerospace. And we work hard in continuous improvement and cost control across the whole Group. GKN entered 2016 as a better company than a year ago. Before I talk about the future; over to Adam for the financials. Adam?

Adam Walker

Thank you, Nigel. Good morning, everyone. I'll take you through the results in the usual format, highlighting some of the key points.

Overall, it's a good set of results given our markets, some of which have been kinder than others, but we've also worked hard to deliver the profits we thought we would at the beginning of the year. Let's look at how we got there. Sales of 7.7 billion, with around 100 million from Fokker, excluding the impact of acquisitions and disposals, gives us 2% organic growth, with profits up £10 million on last year when you back out Fokker producing a margin of 9.2%, steady on 2014. The impact of the acquisition, including the placing shares, combined with an increased tax charge of 24%, up 2% on last year, reduced earnings to 27.8p. But overall, the acquisition is earnings accretive, and we anticipate a return to earnings growth in 2016. Following the announcement at the half year of a 2.9p dividend, we are recommending today a final payment of 5.8p. So overall, 8.7p, a 4% increase.

Turning to our top line, as I said, organic growth of 2%. One division clearly stands out on this slide, Land Systems. Only 6% down in a tough ag market. Although the Land Systems team did work hard, Driveline is the standout performer, 4 percentage points above its market. They had a great year in Europe and a good performance in North America. Staying on the auto theme, PM did well too when you adjust for the impact of the surcharge. Backing this out, they delivered 3% growth. And Aerospace at 2% exceeded our expectations as we declined a bit less from military than we'd thought, and commercial did well, considering the rate reduction on the A330. You can see the impact of Fokker, 113 million, shown separately, with the balance of M&A, largely last year's sale of Emitec, in the column to its left. And to finish on Land Systems and thinking ahead to 2016, regardless of how its end markets perform, we have two chassis contracts finishing which will reduce year-on-year sales by £25 million.

Moving to the profits, not many big up or downs across the divisions, but there was a fair bit going on to deliver an end result pretty similar to last year. Three principal things to bring out; all £18 million. We were helped by currency in the year, particularly those divisions with U.S. operations. You have the detail in the appendix to your pack, and I'm not going to predict currency rates this year or any other year, but at current sterling rates to the dollar and the euro, we would have a substantial pickup in translational currency in 2016. Moving along, you can see the impact of the 18 million of Fokker, which is 13 million of acquisition related costs and 5 million of trading losses as their profit contribution in the sub period was eliminated by a restructuring program that had been planned pre acquisition but was announced in Q4. And the third 18 million is in Land Systems, incorporating the 11 million redundancy charge. The latter was 3 million more than previously highlighted, as clarity over the timing of the end of a chassis contract occurred in Q4.

Divisionally, our profit conversion was not as strong as we would have liked as we grappled with the usual cost and pricing pressures. In Aerospace, as highlight at the half year, we were able to release £22 million in relation to an onerous contract, which alongside settling historic warranty issues of £8 million, flattered the underlying margin. It has been harder to hold the Aerospace margin steady in 2015 as mature programs came to an end and the ramp up on our key commercial and military platforms has not come quite as quickly as anticipated. But nevertheless, I expect underlying margin improvement in Aerospace in 2016. Driveline incurred minor quality and supply chain costs in the normal course of business and was impacted by tough markets in Brazil, although we do remain profitable and the slightly disappointing performance in the first half in Japan. We've talked before that our Chinese JV margins would decline over time and we saw around a 1% fall in 2015. But nevertheless, with improvements across our subsidiaries, the overall Driveline margin has increased to 8.2%.

We had a good performance of PM. The margin is up to 12% with some benefit from the surcharge. And on Land Systems, we converted the sales decline well. When you add back the restructuring charges, the margin would be around 5%. We see no signs of improvement in the core ag market, particularly in the Americas, but it's not all doom and gloom. Our industrial and shafts businesses continue to make good returns. We're finding it tough in our wheels businesses, which account for around a quarter of the divisional revenue and they sell not just into the ag market but also into construction and mining too. So as a Group, we delivered 679 million of trading profit.

Just quickly on Fokker, as we said in July, we expect limited sales growth in 2016 at around €750 million, with growth coming in 2017. But we do expect an improvement in the margin from the inherited 7% as we drive forward with our integration and synergy plan, which will cost around €50 million in 2016. As previously communicated, this will be reported outside the management numbers. Integration work is well advanced, and we remain confident of the financial plans we announced last July, earnings accretive, beating our cost of capital next year, and driving the margin higher over the next three years.

As in previous years, there are a few items which fall outside our management numbers. The biggest is the mark-to-market movement on our forward foreign exchange contracts and intra-Group loans. The difference between the mark-to-market valuations of these open contracts and loans from December 2014 to this yearend leads to a charge of 122 million.

Amortization charges in relation to acquired intangible assets are £80 million, and as usual, we've carried out an annual assessment of the carrying value of our businesses, focusing in particular on those where trading has deteriorated in the year, and this has resulted in an impairment charge of £71 million.

As so to cash flow, a few moving parts in our operating cash flow this year which, as you can see, has improved by £140 million to £525 million. I wish I could say this was a sustained structural improvement, but we are making improvements just not quite at this level.

2014 was impacted by the repayment of £38 million government advance, but the main impact has been 2015's working capital. Whilst there has been an improvement in stock turns in three of the four divisions, the principal reason for the jump is a significant customer advance received just prior to the yearend. We have paid the VAT on this advance in January '16 and, therefore, when thinking about how to look at the full year 2016, the underlying one-off benefit year on year is around £100 million. Our success in winning new business at good margins which underpin the Group's future growth has kept our capital expenditure at around £400 million this year, with more capital going into new aerospace programs and some new larger platform wins in Driveline. With divisional ROICs approaching 20%, we believe this is the right approach. But our underlying cash flow, which was still over 70%, remains a key target for us in 2016. We will continue to try and improve stock turns, especially in Aerospace, and maintain our tight control over commercial working capital.

And turning to the bottom half of the cash flow, we face a few familiar headwinds that we've discussed before. Tax has increased, as we are paying tax in the U.S. for the first time in a number of years. I expect the tax paid to remain around this level subject to where our ongoing profits are generated. We will not pay any cash tax on Fokker's profits over the medium term. On the booked tax rate I'm guiding to mid-20s for the next few years. Our legacy pension payments are GBP42 million, and more on the pension liability in a minute. So free cash flow was 370 million, 136 million higher than last year, benefiting from the customer advance. We ended the year with net debt of 769 million, an increase of 145 since this time last year, but impacted significantly by the cash outflow associated with the Fokker acquisition.

As highlighted at the half year, we had a small improvement in our pension deficit. There has been no significant movement since June, so we end this year with a reduction in the deficit of 153 million since December 31, 2014. This is driven by assumption changes, as some yields increased marginally over the course of the full year. The next triennial valuation for our UK schemes is April 2016. Although the performance of the Fund's assets have been good over the past three years, the reduction in yields over the same period has had a significant impact on the valuation of the liabilities and therefore, the valuation is likely to show a worse position than in April 2013. Negotiation with the trustees will take place over the coming months, and we will update on any future impact on our cash flows at the appropriate time.

And on to our financial metrics: growth above the market, balancing the Group's financial objectives between strong returns and margins to ultimately deliver cash flow which reduces net debt year on year by more than £100 million after dividends. And how are we doing? We've delivered good growth and believe this will continue in 2016. We have held our Group margin steady, and as we integrate the lower margin Fokker businesses, we'll try and hold steady again in 2016. We've improved our ROIC, but this will be impacted in 2016 with the full year impact of Fokker. And free cash flow has been strong. Although it was helped this year by a one-off, cash generation will remain a focus in 2016.

And to conclude, we've delivered on our 2015 plans, maybe not quite in the way we anticipated, but nevertheless, underlying profit growth and improvements in cash. Fokker will boost our earnings in 2016 but our underlying business is expected to grow too. The focus remains on converting the expected sales growth into profit or mitigating as best we can any sales decline in Land Systems. We then need to work hard on turning our profits into cash, improvements in inventory, tough capital allocation, post-investment returns analysis, commercial working capital management. We expect our tax rate to stabilize in the mid-20s, and we continue to manage our pension scheme liabilities, although there are no quick or easy fixes in the new norm of low interest rates. It's been a good year. We are making progress and we look forward to further progress in 2016.

Nigel Stein

Okay. Thanks, Adam. So what's next for GKN? You've just heard that our strategy is working and working well. Just as a reminder, we have five key strategic objectives. Leading in our chosen markets, being selective and the best at what we do, leveraging our global footprints, operating across the globe, keeping close to our customers. Technology driving margins having something special that differentiates us from competition, the best performing, the lightest, the most fuel efficient, the most ingenious solutions to customers' problems. Operational excellence, this is not a given. Running our operations with the best quality, the best delivery and the most competitive cost takes a ruthless focus, but gives us real competitive advantage. GKN's culture is built on a foundation of continuous improvement. And finally, growth of our markets. We accept that our markets may cycle, impacting sales, but whatever the market does, GKN aims to do that bit better. We aim to move ahead of our competitors and become even stronger leaders in our markets. Going forward, we'll be sticking closely to that strategy.

I'd like to take just a minute to remind you where it has taken us today. First, Aerospace, where we are now one of the major Tier 1 suppliers. We started with structures where we are now the global number two. Fokker adds shipset value, and it also enhances our technology leadership with more lightweight materials expertise. And we're developing our position in additive manufacture or 3D printing, which will be used in future aircraft structures. A few years ago, we moved into engines, and today our business is now also number two in that market, with opportunities to grow. The acquisition of Sheets brings innovative lip skin technology for us to exploit. And now, in Fokker Elmo's electrical systems and connectors, we've opened up a potential new avenue for GKN to grow. Future aircraft will be more electrified and we see structures in electrical wiring systems becoming increasingly integrated. With GKN's strong leadership position in these three Aerospace segments, we are confident we can grow our shipset value and be successful across a broad range of programs and customers.

Turning to Driveline, you can see a similar picture. Drive shafts are the largest part of our business and we continue to be the technology and market leaders by some way. Our new VL3 and SX joints are the best on the market, and still open doors for us, as the new Daimler contract confirms. A few years ago, we pushed hard into all-wheel drive, and our success of vehicles such as the Fiat 500X where we designed, tested and built the whole all-wheel drive system, have helped drive our growth to market leaders. And today, anticipating the growth in electric drivetrains, we are building a strong position in eAll-wheel drive. Hybrid and all-electric vehicles were built with drivetrains based on this type of technology and we plan to use our eDrive capability to grow in this segment too. Driveline's evolution again illustrates GKN's ability to adapt and grow seeking out new segments in our markets where we can use our strength and capability to build a leadership position.

With Powder Metallurgy, the story is similar. Starting originally with just sintered parts then moving into powder, we've now built a strong PM leadership position from where we are moving into new technologies such as additive manufacturing and hydrogen storage. As Peter likes to say, for PM the best is yet to come. Land Systems is slightly different. Right now, we are cutting costs and driving efficiency but we're also strengthening our capabilities and creating new niche products and services for our customers ready for the recovery. So GKN never stands still. We are constantly adapting and innovating to meet market changes, sticking to our strategy of being the best at what we do. I am confident in GKN's future.

Turning now to the outlook for 2016, aerospace markets generally remain in transition as some aircraft programs run down and others ramp up. The overall market will be slightly down according to external forecasts. Against that backdrop, GKN Aerospace's 2016 organic sales are expected to be broadly flat, although the results will benefit from the contribution of Fokker. In the medium term, our strong commercial order book supports continuing growth for GKN Aerospace.

In automotive, external forecasts predict growth in global light-vehicle production of around 3%, with increases in China, North America, Europe, and India, while Brazil is expected to show a further sharp decline. Against this background, GKN Driveline and GKN Powder Metallurgy are expected to continue to grow organically above the market. GKN Land Systems sales are expected to fall further due to softer agricultural and construction equipment markets. Although the economic backdrop is uncertain and some of our markets remain challenging, 2016 is expected to be a year of good growth, helped by the contribution from Fokker.

Thank you very much and we'll now open it up to questions. Thank you.

Question-and-Answer Session

Q - Andy Simms

Andy Simms, Citi. Just had a quick question on capacity. You talked about obviously spending on CapEx this year and obviously the growth in programs that you've had. How should we expect that to move going forward, and is there further capacity to come?

Nigel Stein

The spend on CapEx, with regard to CapEx, yes, as Adam referred to in the presentation, we've had a little bit more spend on the Aerospace program, investing on the A350 to make sure we're ahead of that ramp-up curve which is now getting into its stride. And also, in Driveline, we've seen some further CapEx in support of some of the programs, one of which I was mentioning earlier. So that's kept our CapEx slightly higher than we probably would have expected a year ago, but you'll notice the shape we described, particularly in Powder Met coming back down again, and that's exactly what happened. And whilst we see those opportunities, we think it is a good thing for us to pursue and earn that very good near 20% return on invested capital.

Andy Simms

And can I just add a quick one on that? Do you see any issues around tax following the OECD's consultation and decision on what they're going to do with tax globally?

Adam Walker

No, obviously, we're watching it very carefully. We're a global business. I think the way we have managed our tax affairs over a number of years doesn't leave us any concerns. So we are consulting and in terms of any structures that we have in place, we have no concerns.

Andy Simms

Thank you.

Jonathan Hurn

Jonathan Hurn, Credit Suisse. Just a few questions from me. I think the first question was just on the Chinese JV; obviously, 100 basis point reduction in the margin in '15. And what's the kind of thoughts for the margin in the Chinese JV in '16? That was the first question.

Second question was just on the Fokker synergies. Can you just remind us where we are on that and the phasing of those synergies through '16 and '17?

And the last one was just on Driveline and just looking at the new platforms coming. Can you just give us a feel for the phasing of those platforms that you're on through '16 and '17? When are we going to see the kind of peak of the ramp-up levels?

Nigel Stein

Phil, do you want to talk about China?

Phil Swash

I will. So China margin, yes, it did come up about 1%, as you said, Jonathan, which was in line with where we forecast it would be, and we'd expect about the same level of reduction this year. So that convergence that we've probably seen over the last three to four years will continue. Our job, importantly is obviously to manage the China cost base through that phase, but also perhaps more importantly to move the margins up in the regions outside of China, which we've managed to do. So as the China margins come up about 1%, we've equally seen an improvement in Americas and Europe of about the same amount. So that continues to be our strategy. We've got good focus on managing that margin evolution in China and we expect about the same level this year.

In terms of [Multiple Speakers].

Nigel Stein

Yes. Take the second one as well.

Phil Swash

The platform question and when they come in? The major launch for us last year was probably the Fiat, the SUV and the XC90, the Volvo the new first -- Volvo's first new vehicle for a long time. That launch of the Fiat, the SUV, so that's the small SUV vehicle, so the Jeep Renegade and the Fiat 500 first in Europe, which has been very successful that will now be launched this year in Brazil and North America and then later in the year in China. So those launch activities are going on as we speak. XC90 for example, no new platform this year on the back of that but fantastic growth I mean just to put that in perspective, when we first considered the XC90, we were imagining 60 to 100 vehicles a week, and we're now at 600 vehicles a week with a request to go a lot further. So those were the two major launches last year.

Over the next three years, we've got progressive launch with as I said Fiat, the SUV continues. We've got the GM programs, the Camion and the C1XX which will ramp up. And I don't know any more details than that, Jonathan, to be honest. But they layer in. We've got pretty linear growth of new programs but probably the most significant next year for us will be on the all-wheel drive for Chinese domestic markets, Dongfeng and Great Wall. Sorry, not Dongfeng, Great Wall -- maybe it is Dongfeng but I can't recall. But two major all-wheel drives for truck and SUV in China for the domestic market in the second half of this year, which is key for us because one of the reasons for the challenge in China has been that switch from Western to domestic.

Nigel Stein

Okay. Thanks, Phil. Sorry. You can tell Phil's really getting into his Driveline life. He's got all the programs taped and there's a lot going on. There's some great growth from Driveline and we've given you guidance, and we think that growth is going to continue with the program launches we've got. Kevin, there was a question -- sorry, Jon, your second part of your question was about Fokker synergies. Kevin, do you want to pick that one up?

Kevin Cummings

Yes. The Fokker synergies that we anticipate that we will achieve will be over 2016 and 2017, with 2018 a full year. We anticipate that most of it will be accomplished in 2016 with some trickle over into 2017. So we think we'll see quite a bit of increase in 2017. It's on track right now. We have just sent a team in there to work together with the Fokker team. We've completed our integration plan as far as the baseline. Working between the two we have validated the synergies that we had originally planned in there, and so we're very comfortable that in fact it exits and it's there and we are working with the works councils in the Netherlands right now, working through the process to get a positive advice from them, which we are hopeful on. And then we will move forward into full swing. But right now, we are on track to what we had originally stated, and we anticipate that we're -- and I'd say we are optimistic about where we're going to come out on that.

Stephen Swanton

Stephen Swanton, Redburn. I had one question on Aerospace and one on Driveline. And just starting on Driveline, I guess the key thing, barring Jonathan's question on China, is that other subsidiaries are obviously doing really-really well from a margin perspective and I was just wondering if you can tell us a bit more about the pricing environment you're seeing and whether that pickup in U.S. European margins is volume led and just where you are on pricing and pricing heading into 2016?

Then on Aerospace, you look at the growth in the second half, it looks like quite good. And I know when you start to break Aerospace down into quarters it gets a little bit dangerous. But the growth was good, and it looks like it was good towards the end of the year as well, and then we're looking at Aerospace maybe being flat in 2016. Just wondered what the moving parts are between what we saw in the end of last year and into this year.

Nigel Stein

Okay. Phil, do you want to quickly pick up on Driveline pricing [average]? Well, go on. I can add any thoughts after you've finished.

Phil Swash

Well, the pricing pressure is consistent. It doesn't really change. And in -- outside of China, our approach is to manage the pricing changes with growth and we try and ensure that in capturing new business, in deepening our relationships with our customers, we're also trying to make that a win-win position and some of that is by trading price. The benefits and the improvement we've seen in our margin outside of China has largely come from, I would say, a mix between volume and productivity improvements. As Nigel said, we have to be ruthlessly tenacious about that in all of our businesses. It's where we invest some of our CapEx. A lot of the CapEx we've invested is for growth but it's also looking to give us productivity improvements as well.

Nigel Stein

And on Aerospace, can you explain one of the mysteries of the world, which is why the whole aerospace industry is stronger in the second half than it is in the first half?

Kevin Cummings

Well, I might pass on that question. I think what -- as we look at there, yes, we did have a strong second half, and as we go into 2016, the issues that we're going to be faced with is we will see the full year effect of the 330. We only saw about two thirds of the effect, maybe even a little less than that, close to half of what we're going to see because the rate -- we didn't see a full rate decrease of 330 which we are anticipating in 2016. So we're going to take an impact on that going into it. We're also going to see some softening in the 380. As Airbus has announced as far as they're going to be reducing their rates and we are exposed in a pretty large way on 380s, so we're going to see some decrease in our sales on 380.

Then, we'll also see some additional pressures through the military, especially on some of the rotorcraft aircraft; price coming down, especially on the Lynx and the Chinook and a few of the others. So we're going to be under pressure as far as those coming down but offset by the upcoming on 350. And we expect the 320 rate also to start to see the increase in the 320. So we think we're going to see a pretty balanced approach. Once again, we will have growth in commercial into 2016 once again, and it's just our military that's overcoming that overall growth and holding us there or thereabouts even versus given us the full boost that we'd be getting off of the commercial.

Nigel Stein

Okay. And as we've said before of course in 2017, where we see particularly the JSF beginning to ramp up, that's when our military turns around and takes the whole business returning into the growth. And that's exactly consistent with what we've been saying for the last couple of years.

Kevin Cummings

Exactly. And 330 will have stabilized by the end of 2016 and we're actually optimistic maybe 330 has some upside going into 2017.

Nigel Stein

Great. Thank you.

Andrew Carter

Andrew Carter from RBC. A couple of quick ones from me, first of all, on Powder Metallurgy, an old question, but the margin there has obviously been very encouraging in 2015. I don't believe that you've revisited that margin target. Could you talk a little about where we -- why, perhaps why you haven't and where margins there could go?

And then just, I guess, a couple of follow-ons on Fokker. Is there any update on the litigation situation there in North America? And what sort of -- do you have a provision for any issues there and if so, how big is that? And could you give us just a feel as to first thoughts on the services part of Fokker, any initial impressions on that business? Because I recognize it's pretty low margin currently.

Adam Walker

Okay. Perhaps I'll start with the Fokker litigation because there's nothing to update on. Yes, we have made an assessment of where it's going to come out, but we would rather keep that to ourselves until we get to the conclusion of that, which is expected to be in the not too distant future but you never know with the legal system.

And on Powder Met I mean margin targets, I think we talked about before. We said look, we're always striving in all our businesses to move the margin up, so the targets, which were set many years ago to -- when we were nowhere near them, to give an indication of where we could get to, have perhaps passed their sell-by date.

But, Peter, do you want to talk a little bit about Powder Met, the margin, which was very good? And can it go further, I guess, is the question.

Peter Oberparleiter

Yes. I think we got some help on filter and iron powder will again -- or commodities in general will again rise, so we might see it more difficult to raise margins in the future. Although having said that I think we are driving margins through our design copy end by differentiating to other competitors. We think we have something unique to play on the market where -- yes, small increases on these kinds of margins are possible, although the focus is really to grow the business more in terms of volume and maybe less in terms of margin. To be at the level we are, you can't get much, much more out of it; you can't double the margins we have got. So a small improvement on margin but higher focus on growth, I think that's the next year in Powder Metallurgy.

Nigel Stein

Thank you, Peter. And also an increasing spend on R&D and technology and you heard some of the exciting things we're doing. So PM really pushing forward.

Kevin, Fokker services was the question. As I said in my introduction or my speech, it's a learning stage for us. Do you want to say a little bit more on that?

Kevin Cummings

Yes. Right now we had some services business but this is taking us into a different area. I would say at this point, we are in a learning environment truly trying to understand that business and making sure that we can integrate it into our business in the best way possible to make it as successful as possible. But I think it's a wait and see as we learn. We want to be a smart owner before we make any final decisions as far as what we're going to do and how we're going to change the business around to get the most out of it, but that's where we are at right now. We're learning.

Nigel Stein

Okay. Thanks, Andrew.

Andrew Gollan

Andrew Gollan from Berenberg. Similar-ish question for the other new businesses, the electrical and landing gear side. Now you're getting hold of them, getting your arms around them, is there any differences there that are striking or within the business model that you need to get to grips with? It's a new area for you. That's the first one.

And secondly, again, Aerospace actually on the underlying margins. You've predicted underlying progress in 2016. We're obviously folding in Fokker to that which is lower margin. Do you anticipate within two or three years, say, that the combined margins will meet perhaps the lower range of where we've been talking about for that business over the last few years?

Nigel Stein

Okay. Well, just -- okay. Kevin, over to you, they're all Aerospace. Do you want to talk about those?

Kevin Cummings

Yes. So let me talk, the first one as far as electrical and the landing gear parts of the business, there is some structural differences between landing gear, electrical and the services business. And the biggest issue is the customer community which we deal in is entirely different. When we talk about the electrical components and when we talk about the landing gear, it's our traditional customer set. So we're dealing with the large OEMs on the engines as well as the airframes versus services is aftermarket with a different set of customers. So, one, we're much more in tune to that; our customers are much more in tune to it. And the drive for that market is much easier to understand for us. And it fits right into our relationships with our customers, so that's going very well and we're seeing a lot of demand there and we understand that market very well.

And we're pretty bullish on both of those particular areas as far as the demand on the technology and the future as we look out. So we're getting great reception from our customers on that and the technology is well understood in the marketplace and well understood by us.

Switching over to -- I think the second question was the underlying, and we will see some growth in our underlying going in 2016. And in Fokker I think what we've guided people to is we do anticipate that they were at about 7%, we would anticipate at least somewhere around a 3% growth over the next three years. So we expect to -- when you look at that being about 20%, 25% of our business base at 10% margin or better and with our continued growth, we would expect to be in the range as a total business.

Nigel Stein

And I think if you look at our track record, Andrew, the number of acquisitions we've done, we've given similar guidance to improving the margin and delivered on it, so fairly comprehensively.

Kevin Cummings

Yes, and we feel good about this one as well.

Unidentified Analyst

On growth in Driveline, it feels like the organic growth in all-wheel drive and CVJs are at a similar rate at the moment. Is that correct? And what stage do you expect all-wheel drives to actually start to pick up and grow a little bit faster than CVJs?

Nigel Stein

Okay. I'll take that one, Phil, you've said a lot. Because I was the one that said we're going to be more selective in drive shafts and we're going to grow faster in all-wheel drive. Well, guess what. We tried that, but we're doing so well in drive shafts that it just keeps coming and the business has grown very-very strongly. So actually, you're not seeing that much difference over the last couple of years in growth rates. But all-wheel drive comes with much bigger programs, and when you land them, they do take the growth forward. So both sides of the business are doing extremely well. And we're certainly going to hold back. When there's good business to be won on either side of the business we're happy to take it.

Unidentified Analyst

And on a slightly more cautious -- some of the businesses -- the pockets of weakness across the business in Land Systems in China, Brazil in Driveline, and potentially military and Aerospace. Do you plan on restructuring charges in 2016 something that we should factor in, in any of the weaker areas?

Nigel Stein

We don't plan anything now. You can never tell if the market changes, obviously, but, no. And, as we mentioned, actually there was a restructure we planned in Land Systems for this year that actually we brought forward the costs into last year. So there's always small things that happen in a business of this size. There's always some small restructuring. We did do some things in Brazil, and a lot actually in Driveline, and in Powder Met. But it's not in the scheme -- it's not big enough to make it into the numbers, separately disclose the numbers. There's always stuff going on and some markets are going up and some markets are going down, but the breadth of our footprint and our ability to operate around the world is a real asset to us, and one we're used to dealing with.

Unidentified Analyst

They've put a little sign on the [pillar] to liven it up. I hate to be tedious just on this Aerospace thing. The 22 million is in the first half was described as a 10 million release. It's still a release of provisions?

Adam Walker

Correct.

Unidentified Analyst

And this is it, or it continues -- sorry, just to be…

Nigel Stein

There is a small balance left which is in relation to parts that we are making. So if the part is made in line with the production volumes we anticipate, then there will be nothing more. If we don't make as many parts because it's loss-making part, then there might be a little more, but it's very small. It won't make a big difference to any numbers moving forward.

Unidentified Analyst

Okay. It's just we haven't got the provisions note to see that. And when we talk about underlying, that's cleaning it all up for the 22, the 8 and the Fokker stuff.

Nigel Stein

Yes, and there will be 5 million of restructuring going back in, in the core business as well. So, we're clearing all that up.

Unidentified Analyst

And then I'm not trying to be nice here, but A330 looks like it hurt a hell of a lot. And we've seen it elsewhere. The plant is fully depreciated, everything's fully amortized, and that chunk of volume coming out in the second half really looks like --. If we've got an 18%, whatever it is, return on invested capital in Aerospace, A330 must have been twice that.

Nigel Stein

A330 hurt I'd say, Kevin, didn't it? And it's going to hurt us a little bit more in…

Kevin Cummings

The A330 was painful. There's no question.

Nigel Stein

And some of that pain, remember, rolls into 2016 as we come round. It was quarter two that the decline started for us.

Unidentified Analyst

Yes. Just with the utmost respect, don't throw me out, Aerospace has turned into a bit of manana, but then we never saw the A330. Otherwise, this could have been not a bad year.

Nigel Stein

Yes, because it came out -- It was a pretty good year anyway, Sandy.

Adam Walker

And the A330 announcement came about a month after we were here this time last year, so it wasn't anticipated when we were doing this set of results. So you're right. Yes.

Unidentified Analyst

And the last question, I promise, is a really tedious one. If this was an advance payment that arrived at the yearend, why didn't it show up as a big increase in creditors? It seems to have shown up as a big decrease in debtors. I'm just trying to understand the nature of this beast.

Adam Walker

It's a customer advance. It's cash that we've received from a customer in advance for work that's been carried out, so…

Unidentified Analyst

But in the cash flow, the creditors have hardly moved five or something, and it's the debtors that appears to have had a big swing. So I'm just curious as to where it's gone.

Adam Walker

If you get a breakout of the working capital now, it's in customer advances rather than debtors or creditors. That's where you'll see the movement. I'll show it to you.

Unidentified Analyst

Yes, you're going to have to. Sorry. I'm lost now. It's just there wasn't a big reduction in debtor days.

Adam Walker

No. In terms of pure debtors, no. It's tight; it's hard to get our customers to pay it any quicker.

Unidentified Analyst

Well, mine has just stopped.

Nigel Stein

Okay. Thank you, Sandy. Adam can show you that later on. Any more questions?

Nigel Stein

I'm conscious this is a busy day for you guys today, so no more questions? Okay. Well, once again, thank you very much for attending and we'll be around for any questions and further questions people have. Thank you very much.

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